AS we write these lines, Pakistan appears to be inching towards another IMF programme. For PTI’s nascent government, this would be nothing short of unfortunate. In its quest to restore macroeconomic stability, the IMF is likely to impose the kind of conditionalities that only serve to make governments unpopular. Given the US-China tussle in the background, this IMF programme might be even harder to swallow than previous ones.

If it does happen, this will be the 13th bailout since the late 1980s, and the largest ever, a clear indication that despite multiple brushes with bankruptcy, Pakistan has consistently failed to put its house in order. The IMF programme, if it materialises, will deal a severe blow to the new government’s efforts to remove some of the long-standing problems with the economy.

But putting the possibility of an IMF programme aside for a moment, what can one say about the incoming government’s ideas to put the economy back on track? The 100-day plan has a few intriguing ideas, but perhaps the most interesting one is the creation of a sovereign wealth fund to manage the problematic state-owned enterprises (SOEs) that continue to be a massive drain on the economy.

The mere creation of an SWF is by no means a slam dunk.

Asad Umar has eschewed the option of launching yet another simplistic and misguided privatisation drive in favour of a more sophisticated solution: a sovereign wealth fund (SWF). Generally associated with wealthy countries looking to invest their surplus capital, an SWF provides a number of other benefits too. Foremost among them is the buffer it creates between SOEs and the state itself. Normally, SWFs are less bound by the government’s social and political agenda and are more oriented towards increasing asset value and profitability of the entire portfolio, while stimulating the development of national economy. Under the right conditions, this can allow these funds to get rid of bureaucratic and often incompetent oversight and achieve much higher levels of efficiency. SWFs are also able to attract co-investors and strategic partners, both domestic and international, to bring in capital, technology and expertise. Over time, they can go from being administrators of state assets to active investors, as Samruk-Kazyna, Kazakhstan’s SWF was able to do.

Having said that, in the politically messy and institutionally frail reality of Pakistan, the mere creation of an SWF is by no means a slam dunk. For one, it does not change the fact that most high-level decisions even within the confines of an SWF have political analogues. Take PIA, for instance. Over the past several decades, PIA’s top management has sold off its skies to Middle East carriers, hiving off the majority of PIA’s revenues. Strategic reforms in the airline industry will need to undertake a review on open skies policy. There are plenty of examples of airlines owned by SWFs including Singapore Airlines, Air Astana (Kazakhstan), Gulf, Turkish and Malaysian airlines. All of these, however, were far more strategic in their outlook than PIA. The question is, will the new government be able to offer the necessary political support in reversing policies that have destroyed PIA, especially when they involve taking on the Arab states?

Similarly, the vast majority of PTCL shares are still owned by Pakistan. Under Etisalat the company has destroyed hundreds of billions of rupees of value, and still owes $800 million to the exchequer. Is there enough political will to ask Etisalat to sell their stock back to the Pakistani state, and to pay up not only the amount it owes but also the opportunity cost that the Pakistani state has incurred on the delayed payment?

The inevitable conflict between the twin goals of profitability and national service throws up similar challenges. What if turning a company around entails making a choice between exporting more to benefit from higher global prices and meeting domestic consumption? While the former leads to higher profits, the latter gets votes in the next election. Commercially minded entities take advantage of institutional weaknesses, raise switching costs for customers, allocate resources on the basis of profitability, and are prepared to exit a sector if the opportunity cost on the invested capital gets higher. SOEs which become part of SWF portfolios need to reconcile financial and national goals. This can only be done with the support of a strong state which is committed to long-term development.

In an ideal world, the savings, or profits generated by an SOE within the SWF environment would be ploughed back into the fund, re-invested in the SOEs to turn them into national and regional champions. In a less than ideal world, the same capital could be channelled into national debt servicing, military expenditure or a host of other uses, and SOEs sold off to the highest bidder without any consideration for the capabilities that might be squandered in the process.

Traditionally in Pakistan, SOEs have been injected with fresh capital, and relieved of various obligations only to sell them off to buyers. The track record of such privatisations in Pakistan, as Asad Umar understands very well, has not been enviable. Privatisation of the power sector, banking and other sectors, while generating attractive returns for buyers have only hampered national development. Most importantly, many of these buyers, as in the case of PTCL, have destroyed important technological capabilities that were present earlier, leaving the country worse off.

The framework within which the SWF is being created is therefore more important than the vehicle itself. There has to be long-term developmental thinking behind the initiative not to mention an iron will to fight off vested interests eager to profit at the expense of the taxpayer. What one does not want is for the state to take hits only for future buyers’ to profit from the whole exercise. If the taxpayer is to tighten belts then they must also be direct beneficiaries, and not through the mythical trickle-down mechanism. With this initiative Pakistan wishes to enter the world of state capitalism. Without a strong state, it can be a hard nut to crack!

Kamal A. Munir is director of the Centre of South Asian Studies and a professor of strategy & policy at the University of Cambridge. Baljeet K. Grewal is managing director of Samruk-Kazyna, Kazakhstan’s Sovereign Wealth Fund.

Published in Dawn, August 11th, 2018